Thursday, 5 September 2013

How Africa can tackle its tax dodgers

The Netherlands has one tax official for every 333 people; compare that to Nigeria where there is one tax official for every 28,000 people.

Add this skills gap to the out-of-date global taxation system, and foreign multinational companies and Africans themselves can easily dodge paying tax on the continent.

The numbers are certainly eye-catching: Campaigners say Africa lost $814bn (£520.8bn) that could have been taxed from 1970-2010, twice the level of development aid given to the continent in the same period.

The companies themselves stress they have done nothing illegal and some of their executives have said they would welcome paying more tax.

Voters in the UK, US and Europe do not want to see a company getting away with paying little or no tax, especially after having to tighten their belts because of the financial crisis.'Bamboozled'

But it is Africa that is worst affected.

"If you look at the amount that Africa is losing from companies who misrepresent their profits and therefore reduce their tax burden, it's about $38bn in lost tax money per year," says Caroline Kende-Robb, who is part of the panel that produces the annual Africa Progress Report.

"That's more than total foreign direct investment in the continent, and more than aid given from the OECD [Organisation of Economic Co-operation and Development] group of countries, which includes the USA," she says.

Changing the way multinational companies operate therefore, is a priority for G20 countries, who themselves are losing out on revenue too.

"But for it to work in Africa, solutions need to be really global," says Alvin Mosioma, director of Tax Justice Network - Africa.

"The US and the EU are trying to make companies tell them how much money they make in the US and EU.

"But that's not going to work for Africa. There needs to be strong regulations which make companies report what money they are making in any country in the world, so that governments can get the right tax from it."

Some African businesses pay more tax than foreign investors

But there are some things the G20 cannot fix.

In some countries in Africa, large companies have been invited in and given large tax discounts.

It is often governments themselves who have struck a bad deal for their own country.

This subsidiary of British Sugar, which owns the Silver Spoon brand, gets to pay 15% tax, falling to 10%, while most Zambian businesses pay 35%.

The sugar-makers also get a $6.5m rebate on taxes as part of a deal to attract them to invest and build a factory in Zambia.

Martin Hojsik of ActionAid is concerned: "The Zambian public so far has seen 'sweet nothings' rather than a decent amount of tax from this company, which could have been spent on hospitals, schools or roads."

There is no doubt that foreign investment from a company like this brings jobs and development.

But governments have to know how to negotiate.

Tax author Nicholas Shaxson says countries often lose out in the process.

"'In the case of small, vulnerable or inexperienced countries, multinational companies are able to say: 'Don't tax us or we will run away somewhere else.'"

"Governments get bamboozled by these and think that they must give these companies tax holidays and subsidies, which is an attitude driven by a fear of losing investment.

"In the cases where countries have called their bluff, that doesn't always happen. The companies quite often harrumph, pay up, and stay there."

Tax training

Surprisingly, some limited support is being offered by the companies themselves.

“Start Quote

This is an issue that matters as much to a grandmother in Manchester as is does to a mother in Mali”

Caroline Kende-RobbAfrica Progress Report panel

For example, help for African governments to train tax officials has been promised by oil firm Shell, which in the past has battled controversy over its operations on the continent.

"Enhanced transparency and co-operative compliance will only work where there is adequate relevant capacity in the tax authorities and tax collectors, so we are also determined to help governments build that capacity," said Shell chief financial officer Simon Henry in a June speech on taxation.

It is not a purely altruistic act: Shell says that when their tax obligations are clear and predictable it means they can make better business plans.

It is clear that businesses are concerned about what could come out of the G20.

In the same speech, Mr Henry warned that if public goodwill is lost, businesses could suffer as legislators react with even tighter rules and regulations.

Ms Kende-Robb agrees: "Politicians are under pressure.

"This is an issue that matters as much to a grandmother in Manchester as is does to a mother in Mali."

And that is why there are high hopes for action this time at the summit in St Petersburg because, for a change, what is bad for Africa is bad for the world.